First-Time Homebuyer Down Payment Strategies

When deciding if you’re ready to buy a home, the down payment is a top factor in the decision. Fortunately, there are first-time homebuyer down payment assistance programs and helpful tips that can make things easier.

How Can I Get Money for a Down Payment on a House?

When deciding to buy your first home, there are two important factors you need to address right off the bat. One, can I afford the monthly payment? Two, how much do I need to put down on a home?

For most first-time homebuyers, the tougher of the two questions is the down payment. Some people have been setting funds aside and may have saved the down payment themselves while others may tap into 401k or retirement funds to gather the down payment. If neither of these options match up to your situation then you may want to consider a program that allows gift funds (money gifted to the borrower from a family member or close family friend that is not required to be paid back) or a down payment assistance grant or loan.

You might be asking, is there down payment assistance for first-time homebuyers? Yes, there are a lot of programs available and most are aimed at first-time homebuyers or those with low-to-moderate income. Many programs are state, county or city specific so it’s very important to do your research or connect with a loan officer to discuss what options are available.

Can you use multiple down payment assistance programs? It depends. Some programs allow “stacking” down payment assistance (having multiple down payment grants or loans) while others are more restrictive and only allow one to be used.

If you qualify for a Veteran’s Administration (VA) or  United States Department of Agriculture (USDA) loan, you won’t need a down payment but closing costs will still apply. Almost every other loan type, including an FHA loan, will require you to pay for down payment and closing costs.

Some first-time buyers may qualify for down payments as low as 3% on conventional loans while FHA loans allow first-time and move-up buyers to put as little as 3.5% down. Fortunately, there are down payment assistance programs and helpful tips that can make things easier.

How can I get money for a down payment on a house? Let’s start exploring the options.

These are the most common options to afford the down payment on your first home. We suggest working with an experienced loan officer to help you understand your options.

Family Gifts or Loans for Your Down Payment

A common source for down payment for first-time buyers (and move-up buyers) is gift funds, which allow a family member or close friend help cover the cost of the down payment and/or closing costs.

Know this: having a family member cover a portion of the down payment is not as simple your grandmother handing you a stack of cash and calling it good.

While it would be nice if they could just cut you a check, the lender is required by the investor for your loan to have the appropriate documentation. The lender will need to verify that this was indeed a gift which doesn’t require repayment and that your family member has the financial means to make this gift. To do this most loans require you and your family member to sign a gift letter which outlines the amount of the gift, the relationship between the parties and verifies that there it is a gift that doesn’t need to be paid back. Additionally many programs require the person gifting the funds to  provide bank statements or a cancelled check to prove they had the funds available to gift.

Please note that gifts that exceed the federal gift tax limit could be cause tax repercussions for the parties involved, it is advisable to speak with a licensed tax professional to check into the implications prior to transferring funds. Also, there are limitations on who can gift funds to be used on a mortgage transaction so please speak with a loan officer prior to accepting any funds.

Low Down Payment Loan Programs

You can find loans available for first-time homebuyers that have low or no down payment requirements.

No Down Payment Government Loan Options for First-Time Homebuyers

If you are a veteran, active military member or a spouse of a deceased military member, you may qualify for a VA loan. It’s one of the best loan programs available as it allows you to purchase a home with no down payment. But VA loans are not your only no down payment option.

A USDA loan, backed by the Department of Agriculture, is another no down payment loan option. And while the name may suggest otherwise, these loans are not exclusive to farmers. A USDA loan can be used in homes in rural areas, be it a farm with a home or just a home. USDA loans do have limitations on income levels so you will want to connect with a loan officer to find out if this is an option for you.

Low Down Payment Government Loan Options

An FHA loan is backed by the Department of Housing and Urban Development. With an FHA loan, your down payment will depend on a variety of factors, but it can be as low as 3.5%, making it a very attractive and affordable option.

For a little perspective, the median U.S. home price according to the US Census Bureau is $484,400. If you qualified for a 3.5% down payment, you need to have $16,968 to cover the down payment. And yes, there will be other fees involved for closing costs and prepaid taxes and insurance, so it’s best to talk with a loan officer or to use a down payment calculator to get a more accurate expectation of the funds you would need to bring to closing.

Conventional Loan Options with Low Down Payments

You don’t need to have a military affiliation or be moving to a rural area to qualify for a low down payment loan program. If you have a stable financial past and good credit score, you may be able to qualify for a conventional loan with a down payment as low as 3%. Of course, the exact down payment required will depend on your situation, but a conventional loan is considered the most attractive option (outside of a cash offer) for a seller looking at multiple bids.

The Down Side of Low Down Payment Loans for First-Time Homebuyers

Most times people consider the lowest amount of funds they bring to closing the better, however for every convenience there is a cost. Some of the things to keep in mind:

Down payment assistance funds (grant or loan) typically require a second lien against the property and do have closing costs or administration fees that are required on top of those closing costs for your primary loan. They also may have a monthly payment requirement, or a repayment at the time of a refinance or sale of the property which does eat subtract from the equity position you have built. For more information see next section.

The most common of these fees on primary mortgages are the monthly and/or upfront mortgage insurance premiums. It protects lenders against defaults on all FHA loans and conventional loans and typically stays in place for the life of the loan or until the borrower has 20% equity in a home depending on the loan type and the amount of down payment at closing.

A VA loan does not require any mortgage insurance but does have a “funding fee,” that is rolled into the monthly payments. While this fee is regulated and much less than mortgage insurance, it’s still another cost to consider.

A USDA loan requires  an upfront loan guarantee fee added to the loan (in most cases) at closing as well as an annual fee which is charged in the month payment.

Lastly, in most cases the greater your down payment, the lower your interest rate. And that rate difference can add up to a lot of money over a 15- or 30-year loan — a number that far exceeds the money saved upfront. So, it’s always advisable to discuss with a loan officer what options are available, the total costs associated and what best fits your situation. You’ll benefit over the long term. That said, don’t allow “having enough” to paralyze you. Work with a loan officer, run the numbers and together you can decide when the time is right to purchase your first home.

State and Local First-Time Homebuyer Down Payment Programs

The federal government isn’t the only group trying to help first-time homebuyers with their down payments. Many state and local governments, nonprofit foundations and even some employers offer programs as well.

Can I get a grant (forgiven over time) for a down payment on a house? In some cases, yes. Grant programs are hard to come by but are an excellent source of funds when they are available since they don’t require repayment monthly and are often forgiven after you have owned the form for a certain period of time. This means that grants can potentially end up being “free money” over time.

If I can’t find any grants or don’t qualify, are there other options? There are many more options available in the form of down payment assistance loans, which do have to be paid back but may only require a small payment or no payment monthly. Program availability changes depending on funds available, location of home, where you live now, your income level, your status as a first-time homebuyer, etc.

Finding these types of programs is not always easy. Our best advice is to work with a local loan officer. It’s their role to know all of the options available in an area and get you paired with the right choice.

Retirement Fund Withdrawal or Loan

In some situations, first-time homebuyers are able to withdraw money or borrower a loan against their retirement account. Of course, there are rules regarding this depending on your age, the type of retirement program, funds available in the account, etc.

Employer-Sponsored 401(k) Plan

Your 401(k) plan may allow for early withdrawals or loans. If you withdraw funds, you’ll most likely pay income taxes and could have additional penalties against the funds. If your plan allows for a loan, you must repay the money with interest to avoid income taxes and a penalty. Many 401(k) plans offer terms between five-ten years to repay a loan for a primary home. If this is an option you want to look into,  you should locate your plan rules to find out what options you have and potentially even connect with your financial advisor and/or your tax professional to ensure you are looking at it from all angles to avoid any penalties.

Traditional and Roth IRA

You can make withdrawals for first-time home purchases up to $10,000. You will pay income taxes on the withdrawn money but won’t face an additional penalty if the money is used to buy or build a first home in most cases. Before taking any action to withdraw it is advisable to speak with a tax professional.

Find Your First-Time Homebuyer Down Payment Plan

Options are good. But too many options can be confusing. When it comes to finding the best options for affording a down payment for first-time homebuyers, connect with a Summit Mortgage Corporation loan officer. They have the answers that can guide you home.